Mortgage early repayment

What it's for

Adding even a little to each payment can save a lot of interest and pay off the mortgage years early. Here you see how much.

Note

It's a fixed-rate estimate. Always check with your lender for any penalties or conditions on early repayment.

Why one extra payment is worth so much

Every euro paid on top of the instalment goes entirely onto the capital, and therefore wipes out for good the interest that euro would have generated across all the remaining years. That is why the effect looks out of proportion to the amount: you are not saving one instalment, you are removing a slice of debt on which the bank would have charged interest every month until the end.

From which follows the most useful rule: the earlier you pay, the more it counts. A thousand in year five of a twenty-five-year mortgage is worth many times the same thousand in year twenty, because it has fifteen more years of interest to cancel.

Cut the instalment or cut the years

When you take a sum to the bank you choose between two routes, and they are not equivalent. Cutting the term keeps the same instalment and finishes sooner: it is the choice that saves the most interest, because it removes precisely the final years. Cutting the instalment keeps the same end date and costs less each month: it saves less, but it buys breathing room in the budget.

The criterion is not mathematical but situational: if the budget is solid, the term; if it is tight, the instalment. And if the bank does not offer the choice, the request should be made in writing: the option has to be stated, or the lender applies its own preference.

Three questions before paying

Is the emergency fund intact? Money paid into a mortgage does not come back: if the payment leaves you without a cushion, the first setback will be financed with consumer credit costing three times as much. Is there more expensive debt? Clearing a personal loan at 9% before a mortgage at 3% is almost always better. Does your mortgage carry a penalty? Rules differ by country and by contract: in Italy, mortgages taken out after 2007 to buy a main home carry no early-repayment charge, while other loans and older mortgages may, and the contract has to be read.

Then there is the comparison with the alternative: if a safe investment yields more than the mortgage rate, investing is mathematically better. But the certainty of one debt less is not the same thing as the hope of a return, and the choice is partly a matter of temperament, not only of spreadsheet.

The difference between partial and full

Partial repayment lowers the debt and the plan is recalculated: the mortgage continues. Full repayment closes it, and requires an exact settlement figure from the bank, including interest accrued up to the day of payment, plus the paperwork to remove the charge on the property. In Italy that removal is today automatic and free in most cases, but it should be checked: a charge still registered blocks the sale of the house.

Nearby tools

To see how each instalment is split there is Amortisation schedule; to work out what is sustainable, How much mortgage can I afford. For debts other than a mortgage Debt payoff time, and to weigh the alternative Compound interest.